HTC takes a gamble with new brand and OS strategy

Every time Microsoft scores a point in its tortuous quest to become a major mobile player, it seems to suffer a balancing setback. So while the recently announced updates to Windows Mobile made the OS look far more credible on a small device than it had before, the software giant had to endure its primary handset ally, Taiwan's HTC, make a radical strategy shift that seems to sideline Microsoft.

HTC said last week that it would adopt a new global marketing strategy in which virtually all its products would be HTC-branded. This is dramatic because the company had previously been a flagwaver for the trend for handset makers to minimize or erase their own brands in favor of those of the operator.

The cellcos have been increasingly keen to control the branding balance of power and to dictate design terms to their phone suppliers, an ambition that has been fiercely challenged by the handset majors, especially in Europe, where the manufacturers' names carry most weight.

A few years ago, it seemed that the cellcos were winning the battle. Most of the phonemakers submitted to making dual-branded or even unbranded models, though in most cases Nokia has remained adamant. One of the factors that swung the balance in the operators' favor was the option of turning to white label manufacturers, many in Taiwan, for low cost devices - these might not have the R&D and design innovations of a Nokia or Motorola behind them, but the quality of such products has improved greatly over the past years, and this option was a powerful stick with which Vodafone and the others could beat their handset partners into submission.

In this scenario, HTC was particularly important because it was the primary partner for Microsoft in its bid to make Windows Mobile the dominant smartphone platform. Microsoft was determined to exploit the operators' new strong stance against Nokia et al by enticing them towards Windows, with the promise of highly functional smartphones with no manufacturer brand. And HTC was its main ally. The decision by the Taiwanese company to reverse its largely unbranded strategy, then, reflects two shifts in the market, neither welcome to the Windows giant.

One is that Windows Mobile no longer looks like being a sufficiently strong player to support a whole business model. "We are not strictly a Windows house. We are looking at other operating systems," said HTC, in a far cry from its enthusiasm of five years ago over the Microsoft system.

Despite making gains in the enterprise and becoming a fairly robust and well recognized, if relatively minor, smartphone platform, Windows Mobile will clearly be just an element in the mobile picture, and probably a small one compared to Linux and the growing family of Java-oriented OSs like Symbian/Series 60 or Sun's new developments.

Ironically, it is not helped by Microsoft's own branding issues - as in PCs, it may be indifferent to the hardware maker, but it demands control over the user interface and software look and feel. The more this becomes the key differentiator for the mobile internet device, rather than its casing, the more Microsoft it likely to come into conflict with carriers on this issue, as it previously did when it tried to dictate the look and feel of in-car systems to the auto giants.

The second shift that appears to be influencing HTC is the bounceback of the handset brands. After a period where, even in Europe, they seemed to be subordinating themselves to the operators' marketing, the manufacturers are now on the ascendant again. There are many service providers - some newcomers, rather than old-style cellcos - which are now in urgent need of the phonemakers' assistance to help them evolve the new business models they badly need.

Sprint Nextel's push to create a new breed of devices to drive revenues from its WiMAX network investment is a good example. This means that, while the handset makers are under unprecedented pressure to reduce prices and adopt unified approaches in the mass market, they once again hold the reins in the high margin sectors.

Even in the US, where the carriers' brands are paramount, manufacturers are starting to bypass them and sell highly branded products through retail outlets or through alternative service providers (Nokia's increasing investment in selling phones through its own stores or other channels was one factor, no doubt, in its new success at AT&T, which would rather tame the dragon than compete with it.)

And a succession of 'big hit' handsets have strengthened the vendors' brands and showed that the handset makers still understand device marketing as the operators do not. As well as undertaking clever handset launches, such as that of the iconic Motorola RAZR, the phonemakers are increasingly harnessing the power of more generic consumer brands - the hugely successful use by Sony Ericsson of Sony brands such as Walkman and CyberShot; the extension of the Apple iPod phenomenon to the iPhone; and so on.

The renewed strength of handset players seems to be luring HTC to seize some of that power for itself, propelling itself into the higher margins that well branded smartphones carry compared to white label products, and aiming for greater bargaining power with carriers. It recently announced its first true own-branded smartphone and is to acquire its nine Dopod International subsidiaries to strengthen its presence in Asian markets and unify the logos.

Yet HTC is in serious danger of overreaching itself here, and reducing its dependence on Microsoft too abruptly. With $2bn in total annual revenues, it is relatively small in the handset market, though it dominates Windows Mobile, and seems not to have noticed that phone sales are increasingly concentrated on just five majors - Nokia, Motorola, Samsung, Sony Ericsson and LG - whose overall share is rising as other rivals give way to the weight of price pressures and consolidation. Alcatel and Siemens are just two former top 10 players that have quit the game, recognizing that they lacked the scale to play a major role.

And the main reason why HTC has punched so far above its weight, particularly in the US and Europe, has been because of its decision to provide well designed and priced Windows smartphones with only the operator brand, appealing to carriers and making itself indispensable to Microsoft.

While it may have some success in pushing its own products in Asia - though it will face competition from a welter of struggling second tier players such as NEC, Fujitsu and Sanyo - it would be very rash to change its strategy too quickly in the US. It has 80 per cent of the global Windows Mobile market, and this platform is strongest in the US, where Nokia-dominated Symbian holds less sway than in Europe. Linux will start to make inroads, but not in the short term - indeed, the US market is still growing for HTC, which predicts it will account for 30 per cent of its sales in 2007, the same as Asia, while Europe will drop from 60 per cent to 40 per cent.

In the US, all four top cellcos sell HTC Windows products under their own names - most recently, the Cingular 3125 was launched, offering a small $150 smartphone with an alphanumeric keyboard.

The HTC flagship is a PocketPC with a sliding keyboard, which sells as the Cingular 8125, the T-Mobile MDA, the Sprint Nextel PPC 6700 and the Verizon XV 6700. The company points to this device as a "design breakthrough" at a strong price point, and is understandably resentful that it gains no brand credit for that. But being unthreatening to the cellcos has huge advantages in a world where very few phonemakers will be able to survive on a large scale, and while HTC may be able to score some points over the giants in terms of converged devices and performance, those will certainly not be enough to take on the might of Nokia and Motorola in branding terms.

And while it may be smart to spread its wings to more platforms than Windows, it should not discount too quickly the huge benefits of having Microsoft, even in the unfriendly mobile world, on its side and in its debt.

Faultline is published by Rethink Research, a London-based publishing and consulting firm. This weekly newsletter is an assessment of the impact of the week's events in the world of digital media. Faultline is where media meets technology. Subscription details here.